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Most business owners think loans are just about cash flow. Money in, money out. But the IRS sees more than that — and if you don’t, you’re asking for trouble. Loans may not show up as income, but they do leave a footprint on your tax return. Especially if you’re deducting interest or applying for forgiveness.
So here’s the deal. If you're borrowing capital to build something real, that's great. Just don’t treat those funds like free money. Every dollar should have a paper trail. Every deduction needs backup. And every tax decision should be grounded in how the money was used — not just how it looked on the balance sheet.
When a Loan Isn’t Income — And When It Might Be
Nine times out of ten, business loans aren’t taxable. You borrow money, you agree to pay it back — that’s debt, not profit. The IRS doesn’t care how much you borrowed, only how you used it and whether it was forgiven.
But if that loan gets canceled? Different story. Forgiven debt can count as income, especially if the forgiveness didn’t meet the terms laid out by the lender or program. We saw this play out in real time with PPP loans. Plenty of businesses thought forgiveness was a guarantee — it wasn’t. And when forgiveness gets flagged, the IRS expects to see it in your taxable income unless you meet an exception like insolvency.
The Interest You Can Deduct
You can’t write off the principal you repay — that’s just paying back borrowed funds. But the interest? That’s often a deduction. The IRS generally lets you deduct interest on money used to operate or grow your business.
Here’s where that matters most:
- Term loans: Used to hire, purchase inventory, or cover expansion costs? The interest counts.
- Lines of credit: Interest is only deductible on the portion you actually drew — not the full credit line.
- Equipment financing: You can usually deduct the interest and depreciate the equipment itself.
- SBA loans: The government backs it, but the tax treatment is standard. Interest is deductible when used for qualified business activity.
- Merchant cash advances: These aren’t loans, and the fees aren’t always treated as deductible interest. Structure matters here. If it walks like a sale of future revenue, the IRS may not treat it as debt at all.
- Invoice factoring: Depending on how the agreement is structured, fees may or may not be deductible as interest, so it’s important to clarify with your tax professional.
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When Deductions Don’t Apply
Want to claim an interest deduction? You’ll need to prove the loan was real — and that you were on the hook to repay it.
The IRS has three main checkpoints:
- You had a legal obligation to repay the money
- You intended to repay it
- You had a formal borrower-lender relationship, not just a handshake or internal transfer
Fail one of those, and the deduction falls apart. Even if the interest technically came out of your bank account. And if any of the money went toward personal use? That portion’s off the table too. No partial write-offs for your new backyard deck, even if your laptop gets WiFi out there.
The IRS Has a Cap — and Some Businesses Hit It
If your business has averaged more than $29 million in gross receipts over the past three years, there’s a ceiling on what you can deduct. IRS Section 163(j) kicks in and limits how much business interest you can claim.
You’ll need to file Form 8990 and run the numbers to see how much gets through.
Most small and midsize businesses won’t cross that threshold — but those that do need to be strategic. Especially if they're highly leveraged or sitting on multiple financing lines.
Your Tax Strategy Is Only As Good As Your Records
Want to keep deductions? Show your work. You’ll need more than a few bank statements to back up your claims.
Here’s what your documentation should include:
- The loan agreement, signed and dated Amortization schedule showing interest and principal
- Payment records from your business account
- Evidence of what the loan was used for — invoices, receipts, etc.
If the IRS comes knocking, they won’t just take your word for it. Mixing personal and business use is one of the fastest ways to lose a deduction. So if that truck you bought with loan funds is used for both client visits and beach days, you’d better have a mileage log.
Where Most Business Owners Slip Up
1. Calling Everything a Business Expense
Trying to write off coffee runs or birthday dinners as “client development”? The IRS won’t find that clever. Sloppy expense categories can cost you real money or even raise red flags. Most business owners play it safe by using proper accounting tools or bringing in a pro—and plenty stay on track by following best practices for avoiding common business mistakes.
2. Forgetting to Track Interest
Don’t wait until tax time to dig up statements and sort interest from principal. If you miss deductions, you’re giving money away. If you overreport, you risk inconsistencies across your return. Reconcile interest monthly. It’s boring. It works.
3. Screwing Up Forgiveness Reporting
If you received PPP forgiveness or had another loan canceled, that’s a red flag area. If you didn’t meet forgiveness criteria — or just didn’t file the right paperwork — the IRS may treat it as taxable. Reference IRS Pub 4681 and don’t guess. That’s what tax professionals are for.
FAQs
Can I write off a loan?
The loan principal? No. That’s not income, so it can’t be deducted. But the interest? That’s often deductible — as long as the loan was used for your business and the documentation supports it.
How much interest can I deduct?
If your average revenue is under $29 million, there’s no cap. Go ahead and deduct all qualifying interest. If you're above that line, the deduction might be limited. Form 8990 handles that math.
Is an SBA loan a tax break?
Sort of. The principal isn’t deductible, but the interest you pay is — provided the funds were used for qualified business expenses. Think of it as a partial benefit with long-term payoff.
When to Call In a Pro
If your financing mix includes multiple loans, revolving credit, or anything forgiven, you’re in territory where DIY gets risky.
A tax pro helps you:
- Identify which interest is deductible and which isn’t
- Apply deduction limits correctly if you’re over the revenue threshold
- Separate personal and business use cleanly
- Handle loan forgiveness reporting
- Keep the IRS off your back
It’s not just about lowering your bill this year. It’s about setting up clean habits that keep your business running strong and compliant for the long haul. If you're curious how other business owners have handled these kinds of challenges, take a look at some real business success stories that show what’s possible when you use funding strategically.
Money Moves With a Paper Trail
Taking on capital isn’t the hard part. Using it the right way — and defending how you used it at tax time — that’s where businesses get caught off guard. There’s no excuse for sloppiness when the deductions are there for the taking. But there’s also no forgiveness when you blow past the rules.
At BusinessCapital.com, we help business owners do more than get funded. We help them fund smart — with clarity, speed, and an understanding of what it means for their taxes, not just their bank account.
Need Help Securing Business Capital?
If you’re planning your next funding move, we’ll help you weigh the tax impact upfront. Our team has guided thousands of business owners through fast, flexible financing with zero equity required and zero confusion about what happens next.
Call 877-400-0297 to speak directly with a funding advisor or apply online in minutes for a same-day decision.
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